DirecTV Will be a Loss Leader

DirecTV Now will offer customers the ability to stream more than 100 channels of content on any device from a smartphone to a 55 inch TV starting at $35 a month with, no annual contract, no credit check, no installation charges, no set top box, and, for AT&T mobile customers, no data charges.

Margins will be super thin to non-existent, as the “cost of goods”represents as much as 97 percent of revenue. Craig Moffett, MoffettNathanson equity analyst, estimates the  the cost of the channels expected to be included in DirecTV Now is likely around $34, which would leave just $1 a month before other expenses including overhead and marketing.

Under most circumstances, that sort of underlying cost, and retail profit margin, would be characteristic of a “loss leader.” And that is among the strategic principles AT&T likely is following: grab market share in a big new content distribution market. AT&T already is the leading U.S. provider of linear video entertainment, so assuming a “winner takes all” dynamic comes to characterize streaming video markets, AT&T would be compelled to aggressively take market share from the existing early leaders.

That, by the way, is characteristic of how big tier-one telcos, including AT&T, have in the past come to lead other markets. AT&T was not first to offer dial-up internet access or digital subscriber line services. Those markets were pioneered by independent third parties. AT&T was not an early leader in linear video services or mobile services (arguably).

That is not the only way AT&T has entered new markets such as connected cars, where it arguably is an early leader in the connectivity services segment of the market, but is an established growth strategy that might be called “let others pioneer; we will scale the business.”

DirecTV Now, the new AT&T streaming video service, is interesting and important for several reasons. The move illustrates a classic method by which AT&T and other tier-one service providers enter and lead big new markets.

The regulatory challenges posed by use of a single access platform (IP and internet) to support multiple business models bridging formerly-distinct industries also are key issues. In other words, as the single physical network now supports multiple logical services historically regulated in distinct and highly-disparate ways--from common carrier to unregulated content--how to regulate formerly-distinct industries becomes an issue.

Entry into the retail streaming video business also illustrates the broader strategic challenges faced by access providers, and the the growth model.

Finally, DirecTV Now also encapsulates the principle that “near-zero pricing” of both access and carrier services remains a key underlying reality--perhaps “the” underlying reality--faced by the access services industry.

Perhaps shockingly, every carrier service is facing a long-term trend of retail pricing that moves closer to zero. That has been true of voice, messaging, internet access and entertainment video, not to mention wholesale services such as wide area network transport.

Some two decades ago, it was possible to hear top executives in the internet and computing industries argue that “bandwidth wants to be free,” with retorts that “software wants to be free.” As it turns out, both assertions captured the general movement of prices across access and software businesses.

With the caveat that “nothing is really free,” advertising-supported software is a dominant business model. Wi-Fi is the best example of “no incremental cost” internet access. But all “for fee” communications apps and services are trending ever-lower in absolute cost as well.

Pricing for DirecTV Now is but the latest example.

Old Regulatory Silos Do Not Work

Mobile video traffic is forecast to grow by around 50 percent annually through 2022 to account for nearly 75 percent of all mobile data traffic by that point.

Social networking is expected to grow by 39 percent annually over the next six years. However, its relative share of traffic will decline from 15 percent in 2016 to around 10 percent in 2022. Other application categories have annual growth rates ranging from 19 to 34 percent, so are shrinking as a proportion of overall traffic.

To be sure, not all the video is driven by subscription video. Embedded video in social media and web pages continues to grow. But subscription video will be the single biggest eventual driver of bandwidth consumption, as watching an hour of Netflix TV or movies might consume between 1 GB and 3 GB per hour.

The growing dominance of video traffic on internet access networks of all types raises some questions beyond the sheer amount of data to be carried.

Some three decades ago, it would have been common to hear observers talking about convergence, whereby all media types--from voice to messaging; print content to video and music--would be conveyed to consumers using a single, integrated access platform. We do not use the term much, anymore, because it simply is the way communications and content are used or consumed using internet mechanisms.

In 1983, Professor Ithiel de Sola Pool said:

“Separate nations will have separate networks, as they do now, but these will interconnect. Within nations, the satellite carriers, microwave carriers, and local carriers may be—and in the United States almost certainly will be—in the hands of separate organizations, but they will interconnect. So even the basic physical network will be a network of networks. And on top of the physical networks will be a pyramid of service networks. Through them will be published or delivered to the public a variety of things: movies, music, money, education, news, meetings, scientific data, manuscripts, petitions, and editorials.”

De Sola Pool correctly identified several fundamental features of the coming “next generation network:” that it would separate logical and physical networking, becoming a network of networks; and that all media types would be accessible from one physical platform. That might seem unremarkable. That is not the case.

Recall that the IBM PC had been introduced in 1981 and that the Ethernet networking standard was released in 1983. In 1984, home computer ownership might have been about 10 percent and about 1.4 percent used the internet--using dial-up modems. There was no World Wide Web. In other words, the shape of the world to come was anything but clear.

More important than the identification of the technology developments, de Sola Pool grasped the implications for regulation.

“In the coming era, the industries of print and the industries of telecommunications will no longer be kept apart by a fundamental difference in their technologies.”

Keep in mind the traditional regulation of various media types. Print content is essentially unregulated. Cable TV is lightly regulated. Broadcast TV and radio are more regulated. Voice and messaging are heavily regulated using a utility model.

All that becomes problematic in an era where all those media types can be--and are--internet or IP apps, and when apps mix and mingle all those media types, and when any type of company can compete in another segment’s business. In that scenario, old regulatory frameworks simply do not work very effectively. Some contestants face constraints their competitors do not.

Telcos have mandatory wholesale obligations and sometimes price controls; cable TV companies do not. Some app providers have universal service obligations; others do not. Some app and access suppliers are constrained where it comes to retail pricing and packaging (zero rating), while others are not.

Some apps and services are covered by content rules, others are not.

The point is that the coming shift to on-demand content delivery is going to stress regulatory models and notions of fairness. Traditionally, “media” firms are free of content and other rules related to their business models. Cable TV firms essentially are free to set their own prices and packaging policies. Some telcos remain highly or substantially regulated in that regard.

But nearly all larger contestants in internet content markets now are “media” companies to some significant extent, and moving more in that direction.

That is going to keep exposing irrationalities in the legacy regulatory structure. The internet is used by “everything.” But not everything using the internet and IP actually has been historically regulated (or not regulated) as a “data” app.

There are multiple frameworks to resolve.

source: Ericsson

Include DOCSIS in Gigabit Plans?

The European Commission, pushing a goal of gigabit internet access by 2025, tends to focus exclusively on fiber to home as the mechanism.

Not surprisingly, Liberty Global argues a “range of technologies” will be required, and should be backed.  

So argues Communications Chambers, a communications and media consultancy firm, which also argues a broad range of technologies, including fiber-to-the-premises (FTTP), DOCSIS, G.fast and high-speed cellular access (particularly 5G) will be required to deliver a minimum 100 Mbps to all households and at least 1 Gbps to users such as schools and large businesses.

Liberty Global has an obvious stake in the outcome, as well as the policies intended to further the goal.

Not surprisingly, Liberty Global argues that hybrid fiber coax DOCSIS networks could deliver gigabit broadband by 2017 and at a lower cost than using FTTP, as obviously has been the case in the United States, the United Kingdom and some other markets.

In part, the argument seeks to dampen financial support that could be given to rivals, or perhaps, more optimistically, lead to funds being made available to support HFC upgrades, not just fiber to premises deployments or 5G.

Order of Magnitude Increase in Mobile Data Between 2016 and 2022

By the end of 2022  there will be 8.9 billion mobile subscriptions in use, Ericsson predicts.  Mobile broadband subscriptions will reach eight billion, accounting for 90 percent of all mobile subscriptions.

The number of unique mobile subscribers is estimated to reach 6.1 billion by the end of 2022.

Monthly data traffic per smartphone continues to increase in all regions. North America has the highest usage, with 5.1 GB per month per active smartphone expected by the end of 2016. In 2022, North America will still be the region with the highest monthly usage (25 GB), but other regions will be catching up.

That represents an increase of almost 40 percent since the end of 2015.

Total mobile data traffic is expected to rise at a compound annual growth rate (CAGR) of around 45 percent In the future. Between 2016 and 2022, smartphone traffic is expected to increase by 10 times and total mobile traffic for all devices by eight times. By the end of this period, more than 90 percent of mobile data traffic will come from smartphones.

source: Ericsson

source: Ericsson

Why Telecom and Internet App Cultures are So Different

Those of you who have spent any appreciable amount of time in and around both the telecom and application industries recognize there are cultural differences between practitioners in both types of industries, beyond any differences in age, gender, educational attainment or any of the other “protected class” categories human resources people deal with.

There are good reasons for those differences. The fundamental business models that drive each industry are quite distinct, and in some ways polar opposites. Ubiquitous access and mobile networks are capital intensive and based on use of “scarce” licensed spectrum resources. Internet-based application businesses are asset light and based on abundance (nearly zero costs to product an incremental unit).

And though the direction of change in the access business is towards more abundance, retail access facilities remain relatively expensive and capital intensive, where it comes to scaling operations. “Web scale” providers also have to make heavy capital investments upfront, but the cost of supplying incremental units of supply is quite low.

In fact, it would not be incorrect to say that whole Internet application business model is based on abundance: universal access by anyone, on any device, from anywhere, for any reason, at any time.

In other words, to a great extent, application business models are based on Moore’s Law, and the abundance Moore’s Law brings to computing. As with coding, resources are so abundant (compute cycles and memory) that resources can be “wasted.”

Rarely are access network professionals so casual about “wasting” resources. In fact, much effort goes into finding ways to minimize the need for additional investment in capability.

source: MIT Sloan Review

Cable Dominates U.S. Internet Access at Higher Speeds

One reason a perhaps-growing number of observers believe U.S. cable TV companies will continue to dominate the fixed network internet access market is their domination of accounts sold at higher speeds. In mid-2015, for example, Comcast had about 41 percent share of accounts operating at speeds faster than 50 Mbps. Verizon, along among U.S. telcos, had 11 percent of such accounts. Cable companies as a whole had 88 percent of accounts offering service at 50 Mbps or faster. All telcos collectively had 12 percent share of such accounts.

source: Free Press

What Will New FCC Do?

Though it is hazardous to make too many predictions even before the U.S. Federal Communications Commission is reformed under President Donald Trump, it is safe to presume that a "lighter" touch on regulation  and likely a better chance for merger approvals could be in the offing. Just how much change is possible remains the issue.

Economist Jeff Eisenach and former Sprint Corp. lobbyist Mark Jamison now lead the Trump administration transition team to oversee hiring and policy for the FCC, and both are opponents of robust interpretations of network neutrality.

It is not yet clear how the new FCC will view existing rules such as Title II common carrier rules for internet access services, but it is likely the new Commission will not agree with that framework for internet access.

What is less clear is the type of network neutrality policies the FCC might consider. The present FCC had embraced “strong” forms of neutrality. The next FCC might opt for “modest” forms of neutrality. That might include the “no blocking of lawful apps” stances, or perhaps equal treatment of providers and apps within classes, but not a strict prohibition on optional access services that feature higher quality of service.

It is possible--in fact likely--that “best effort only” access (one functional definition of network neutrality) for consumer internet access would be retained, although various forms of managed services, zero rating and perhaps other packaging practices would be allowed to proceed, as well.

As it is lawful for an application provider to use content delivery services that actually do act to speed the delivery of some packets, but not all, it is possible optional tiers of service that include quality of service mechanisms might be allowed.

Still, the Commission might wait for Congressional direction on that matter.